ROBERT 0.

KEOHANE

The Theory of Hegemonic Stability and Changes in International Economic Regimes, 1967-1977

Background
In 1967 the world capitalist system, led by the United States, appeared to be working smoothly. Europe and Japan had recovered impressively from World War I1 and during the 1960s the United States had been enjoying strong, sustained economic growth as well. Both unemployment and inflation in seven major industrialized countries stood at an average of only 2.8 percent. International trade had been growing even faster than output, which was expanding at about 5 percent annually; and direct investment abroad was increasing at an even faster rate.' The Kennedy round of trade talks was successfully completed in June 1967; in the same month, the threat of an oil embargo by Arab countries in the wake of an Israeli-Arab war had been laughed off by the Western industrialized states. Fixed exchange rates prevailed; gold could still be obtained from the United States in exchange for dollars; and a prospective "international money," Special Drawing Rights (SDRs), was created in 1967 under the auspices of the International Monetary Fund (IMF). The United States, "astride the world like a colossus," felt confident enough of its power and position to deploy half a million men to settle the affairs of Vietnam. U.S. power and dynamism constituted the problem or the promise; "the American challenge" was global. Conservative and radical commentators alike regarded U.S. dominance as the central reality of contemporary world politics, although they differed as to whether its implications were benign or malign.2 A decade later the situation was very different. Unemployment rates in the West had almost doubled while inflation rates had increased almost threefold. Surplus capacity had appeared in the steel, textiles, and shipbuilding industries, and was feared in other^.^ Confidence that Keynes-

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ian policies could ensure uninterrupted growth had been undermined if not shattered. Meanwhile, the United States had been defeated in Vietnam and no longer seemed to have either the capability or inclination to extend its military domination to the far corners of the world. The inability of the United States to prevent or counteract the oil price increases of 1973-1974 seemed to symbolize the drastic changes that had taken place. The decade after 1967 therefore provides an appropriate historical context for exploring recent developments in the world's political economy, and for testing some explanations of change. What changes are observed, and how can they be accounted for in a politically sophisticated way? As the question suggests, this chapter has both a descriptive and an explanatory aspect. Descriptively, it examines changes between 1967 and 1977 in three issue areas: trade in manufactured goods, international monetary relations, and petroleum trade. The focus in each issue area is on the character of its international regimethat is, with the norms,.rules, and procedures that guide the behavior of states and other important actor^.^ In each issue area an international regime can be identified as of 1967; and in each area identifiable changes in that regime took place during the following decade. These changes in regimes constitute the dependent variable of this study. The explanatory portion of this chapter attempts to test a theory of "hegemonic stability," which posits that changes in the relative power resources available to major states will explain changes in international regimes. Specifically, it holds that hegemonic structures of power, dominated by a single country, are most conducive to the development of strong international regimes whose rules are relatively precise and well obeyed. According to the theory, the decline of hegemonic structures of power can be expected to presage a decline in the strength of corresponding international economic regimes. It is necessary to explain more fully what is meant in this chapter by a n "international regime," and to specify the criteria used here for the selection of a theory to account for regime change. The major changes that took place in each of the three regimes during the decade after 1967 will be briefly described before turning to the problem of explanation.

The Concept of International Regime

The concept of international regime can be relatively narrow and precise or quite elastic. Regimes in the narrow sense are defined by explicit rules, usually agreed to by governments at international con-

ferences and often associated with formal international organizations. The International Telecommunications Union, for instance, supervises rules governing radio broadcasting. International commodity agreements have sometimes been characterized by explicit agreements about international price maintenance arrangements. The international monetary regime agreed to at Bretton Woods, which came fully into force at the end of 1958, was characterized by explicit rules mandating pegged exchange rates and procedures for consultation if exchange rates were to be changed. With some exceptions these rules were respected by governments during the early- to mid-1960s. The nondiscriminatory reciprocal trade regime of the General Agreement on Tariffs and Trade (GATT) contains rules about which governmental measures affecting trade are permitted, and which are prohibited, by international agreement. Each successive trade negotiation adds to the list of rules, although some of the old rules have decayed over time. The definition of regime employed in this chapter, however, is more elastic than this relatively precise and rule-oriented version. The focus is less on institutionalization and rule development than on patterns of regularized cooperative behavior in world politics. Therefore this chapter includes as regimes those arrangements for issue areas that embody implicit rules and norms insofar as they actually guide behavior of important actors in a particular issue area. The distinction between explicit and implicit rules is less important than the distinction between strong regimes - in which predictable, orderly behavior takes place according to a set of standards understood by participants - and weak ones - in which rules are interpreted differently or broken by participants. Explicit regimes may be stronger than implicit ones, but this is not always the case, as indicated by the weakness of the international monetary regime between 1971 and 1976 despite the fact that the rules of Bretton Woods still remained nominally in force. By this definition, there have not only been international regimes for money and trade during the postwar period, but there has also been an international regime governing the production for export, and the pricing, of oil. In 1967 this regime was dominated by the major international oil companies and their home governments, and the norms emphasized maintaining cooperation among the companies (through a variety of joint agreements, especially with respect to production), acting to maintain barriers to entry by new producers, limiting price competition (with increasing difficulty as the industry became somewhat less concentrated), and refraining from competing with one another vis a vis the host governments, in order to avoid bidding up the price of concessions or the host governments' share of the profit^.^ In 1977 the regime for oil was

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quite different: its norms had been developed by oil-producing governments largely within the framework of the Organization of Petroleum Exporting Countries (OPEC), with the strongest norm being the injunction not to sell oil so far, or so massively, below the official OPEC price that the cartel structure would be threatened. For both 1967 and 1977 operative norms can be identified and therefore it can be asserted that an international regime existed, although patterns of behavior may have been more orderly and predictable in 1967 than in 1977. The concept of international regime enables a coherent analysis of changes in world politics. Rather than on an explanation of particular events, in which idiosyncratic and frequently random factors have played a role, the focus is on a pattern of events - not on particular bargaining outcomes but on what a pattern of bargaining outcomes reveals about implicit norms and rules in world politics. Fragments of political behavior take on additional meaning when thought of in terms of regimes: they are part of a larger mosaic, a context within which they become intelligible.6 In this larger mosaic, accidental factors and improbable events become less important, since the focus is on a pattern of behavior and overall trends rather than on one particular event or another. Having identified the international regime and described how it has changed, we can then proceed to the second, more difficult analytical task-to account for these changes in terms of deeper political and economic forces. Describing changes in regimes provides interpretive richness for the analysis of political behavior; attempts to explain these changes may lead t o insights about causal patterns. The emphasis in the study of international regimes has usually been on their creation-how and under what conditions they developed. Here, however, stress must necessarily be placed on the dis-integration of international regimes. Can their collapse in theoretically interesting ways be explained? For policymakers, periods of stress are threatening and difficult; for students of world politics, however, they provide opportunities for insights into change.

Explaining Changes in International Regimes

This chapter attempts to account for changes in international regimes over time. It therefore poses different questions from those of the literature on comparative foreign policy, particularly comparative foreign economic policy, which seeks to account for cross-national variation in policy historically as well as at similar points in time.7 Assuming that

such policy variation exists without trying to explain it, we focus here on the international regimes that result from political bargaining among governments. Changes in international economic regimes could in principle be explained by either domestic or international developments or by some combination of the two. Shifts in the policies or constitutional status of national governments can be extremely important-elections, coups d'ktat, and social revolutions may change the orientation of major states toward the world economy and therefore affect international economic regimes. The coming to power of fascist regimes in Italy, Japan, and Germany during the interwar period certainly helped (along with other factors) to push the world toward autarchic and semiautarchic arrangements during the 1930s. The Iranian revolution of 1978-1979 has exerted significant effects, a t least in the short run, on the international petroleum regime; and there is little doubt that a nationalist-fundamentalist revolution or coup in Saudi Arabia would have more profound and farreaching implications. From a theoretical standpoint, however, explanations of regime change based on domestic politics would encounter serious problems. So many potentially important causal factors become potentially important that one can no longer construct a parsimonious model that facilitates interpretation and anticipation (if not prediction) of events. Sickness or assassination of a ruler, the revival of fundamentalist values, or failure in war can lead to changes in national policies affecting international regimes. Since many of these phenomena represent unique events involving large elements of chance they cannot be intelligently incorporated into a theory. In principle, therefore, it is impossible to obtain a complete theory of international economjc regime without developing an integrated theory of national and international politics. The search for theoretical completeness would therefore lead to descriptive anarchy: investigation of domestic political reasons for international regime change could easily lead to an increasingly diffuse set of ad hoc observations about particular cases. The result would be a theoretical inductivism in which "additional variables" were added to the account at will. If we wish to build theory, it makes more sense to proceed in the opposite way, by constructing a relatively parsimonious theory that purports to explain relevant phenomena through the use of propositions linking a small number of variables to one another. Such a theory will not account perfectly for the observed changes-after all, the independent variables will not include the personalities of either a de Gaulle or an Ayatollah Khomeini- but it should correctly explain ten-

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dencies and directions of change. Whether it does so - not whether it accounts for every perturbation or crisis-is the test of its theoretical adequacy . 8 A parsimonious theory of international regime change has recently been developed by a number of authors, notably Charles Kindleberger, Robert Gilpin, and Stephen Krasner. According to this theory, strong international economic regimes depend on hegemonic power. Fragmentation of power between competing countries leads to fragmentation of the international economic regime; concentration of power contributes to stability.9 Hegemonic powers have the capabilities to maintain international regimes that they favor. They may use coercion to enforce adherence to rules; or they may rely largely on positive sanctions - the provision of benefits to those who cooperate. Both hegemonic powers and the smaller states may have incentives to collaborate in maintaining a regime- the hegemonic power gains the ability to shape and dominate its international environment, while providing a sufficient flow of benefits to small and middle powers to persuade them to acquiesce. Some international regimes can be seen partially as collective goods, whose benefits (such as stable money) can be consumed by all participants without detracting from others' enjoyment of them. Insofar as this is the case, economic theory leads us to expect that extremely large, dominant countries will be particularly willing to provide these goods, while relatively small participants will attempt to secure "free rides" by avoiding proportionate shares of payment. International systems with highly skewed distributions of capabilities will therefore tend to be more amply supplied with such collective goods than systems characterized by equality among actors. O The particular concern of this chapter is the erosion of international economic regimes. The hegemonic stability theory seeks sources of erosion in changes in the relative capabilities of states. As the distribution of tangible resources, especially economic resources, becomes more equal, international regimes should weaken. One reason for this is that the capabilities of the hegemonial power will decline-it will become less capable of enforcing rules against unwilling participants, and it will have fewer resources with which to entice or bribe other states into remaining within the confines of the regime. Yet the incentives facing governments will also change. As the hegemonial state's margin of resource superiority over its partners declines, the costs of leadership will become more burdensome. Enforcement of rules will be more difficult and side payments will seem less justifiable. Should other states-now increasingly strong economic rivals - not have to contribute their "fair shares" to the collective enterprise? The hegemon (or former hegemon) is likely to seek to

place additional burdens on its allies. At the same time, the incentives of the formerly subordinate secondary states will change. They will not only become more capable of reducing their support for the regime; they may acquire new interests in doing so. On the one hand, they will perceive the possibility of rising above their subordinate status, and they may even glimpse the prospect of reshaping the international regime in order better to suit their own interests. On the other hand, they may begin to worry that their efforts (and those of others) in chipping away at the hegemonial power and its regime may be too successful- that the regime itself may collapse. This fear, however, may lead them to take further action to hedge their bets, reducing their reliance on the hegemonial regime and perhaps attempting to set up alternative arrangements of their own. As applied to the last century and a half, this theory - which will be referred to as the "hegemonic stability" theory -does well at identifying apparently necessary conditions for strong international economic regimes, but poorly at establishing sufficient conditions. International economic regimes have been most orderly and predictable where there was a single hegemonic state in the world system: Britain during the midnineteenth century in trade and until 1914 in international financial affairs; the United States after 1945. Yet although tangible U.S. power resources were large during the interwar period, international economic regimes were anything but orderly. High inequality of capabilities was not, therefore, a sufficient condition for strong international regimes; there was in the case of the United States a lag between its attainment of capabilities and its acquisition of a willingness to exert leadership, or of a taste for domination depending on point of view. ' The concern here is not with the validity of the hegemonic stability theory throughout the last 150 years, but with its ability to account for changes in international economic regimes during the decade between 1967 and 1977. Since the United States remained active during those years as the leading capitalist country, the problem of "leadership lag" does not exist, which raises difficulties for the interpretation of the interwar period. Thus the theory should apply to the 1967-1977 period. Insofar as "potential economic power" (Krasner's term) became more equally distributed -reducing the share of the United States - during the 1960s and early to mid-1970s, U.S.-created and U.S.-centered international economic regimes should also have suffered erosion or decline. The hegemonic stability thesis is a power-as-resources theory, which attempts to link tangible state capabilities (conceptualized as "power resources") to behavior. In its simplest form, it is what James G. March calls a "basic force model" in which outcomes reflect the potential power (tangible and known capabilities) of actors. Basic force models typically

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fail to predict accurately particular political outcomes, in part because differential opportunity costs often lead competing actors to use different proportions of their potential power. Yet they offer clearer and more easily interpretable explanations than "force activation models," which incorporate assumptions about differential exercise of power.I2 Regarding tendencies rather than particular decisions, they are especially useful in establishing a baseline, a measure of what can be accounted for by the very parsimonious theory that tangible resources are directly related to outcomes, in this case to the nature of international regimes. The hegemonic stability theory, which is systemic and parsimonious, therefore seems to constitute a useful starting point for analysis, on the assumption that it is valuable to see how much can be learned from simple explanations before proceeding to more complex theoretical formulations. Ultimately, it will be necessary to integrate systemic analysis with explanations at the level of foreign policy. Domestic forces help to explain changes in the international political structure; changes in the international political structure affect domestic institutions and preferences.13 This chapter focuses only on one part of the overall research problem: the relationship between international structure and international regimes. It examines to what extent changes in recent international economic regimes can be accounted for by changes in international power distributions within the relevant issue areas.

Changes in International Economic Regimes, 1967-1 977

The dependent variable in this analysis is international regime change between 1967 and 1977 in three issue areas: international monetary relations, trade in manufactured goods, and the production and sale of petroleum. These are not the only important areas of international economic activity - for example, foreign investment is not included -but they are among the most important.I4 Descriptive contentions about international regime change in the three chosen areas are that (1) all three international regimes existing in 1967 became weaker during the subsequent decade; (2) this weakening was most pronounced in the petroleum area and in monetary relations, where the old norms were destroyed and very different practices emerged - it was less sudden and less decisive in the field of trade; and (3) in the areas of trade and money, the dominant political coalitions supporting the regime remained largely the same, although in money certain countries (especially Saudi Arabia) were added

to the inner "club," whereas in the petroleum issue area, power shifted decisively from multinational oil companies and governments of major industrialized countries to producing governments. Taking all three dimensions into account, it is clear that regime change was most pronounced during the decade in oil and least pronounced in trade in manufactured goods, with the international monetary regime occupying an intermediate position. These descriptive contentions will now be briefly documented and then interpreted, inquiring about the extent to which the hegemonic stability theory accounts for these changes in international economic regimes. The international trade regime of the General Agreement on Tariffs and Trade was premised on the principles of reciprocity, liberalization, and nondiscrimination. Partly as a result of its success, world trade had increased since 1950 a t a much more rapid rate than world production. Furthermore, tariff liberalization was continuing: in mid-1967 the Kennedy round was successfully completed, substantially reducing tariffs on a wide range of industrial products. Yet despite its obvious successes, the GATT trade regime in 1967 was already showing signs of stress. The reciprocity and no~discriminationprovisions of GATT were already breaking down. Tolerance for illegal trade restrictions had grown, few formal complaints were being processed, and by 1967 GATT did not even require states maintaining illegal quantitative restrictions t o obtain formal waivers of the rules. The "general breakdown in GATT legal affairs" had gone very far indeed, largely as a result of toleration of illegal restrictions such as the variable levy of the European Economic Community (EEC), EEC association agreements, and export subsidies.l5 In addition, nontariff barriers, which were not dealt with effectively by GATT codes, were becoming more important. The trade regime in 1967 was thus strongest in the area of tariff liberalization, but less effective on nontariff barriers or in dealing with discrimination. In the decade ending in 1967 the international monetary regime was explicit, formally institutionalized, and highly stable. Governments belonging to the International Monetary Fund were to maintain official par values for their currencies, which could be changed only to correct a "fundamental disequilibrium" and only in consultation with the IMF. During these nine years, the rules were largely followed; parity changes for major currencies were few and minor.16 In response to large U.S. deficits in its overall liquidity balance of payments, the U.S. government introduced an Interest Equalization Tax in 1963 and voluntary capital controls in 1965; in addition, a variety of ingenious if somewhat ephemeral expedients had been devised, both to improve official U.S. balance of payments statements and to provide for cooperative actions

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by central banks or treasuries to counteract the effects of destabilizing capital flows. Until November 1967 even British devaluation (seen by many as imminent in 1964) had been avoided. Nevertheless, as in trade, signs of weakness in the system were apparent. U.S. deficits had to a limited extent already undermined confidence in the dollar; and the United States was fighting a costly war in Vietnam which it was attempting to finance without tax increases at home. Consequentially, inflation was increasing in the United States." The international regime for oil was not explicitly defined by intergovernmental agreement in 1967. There was no global international organization supervising the energy regime. Yet, as mentioned above, the governing arrangements for international oil production and trade were rather clear. With the support of their home governments, the major international oil companies cooperated to control production and, within limits, price. The companies were unpopular in the host countries, and these host country governments put the companies on the defensive on particular issues, seeking increased revenue or increased control. However, as Turner puts it, "the critical fact is that the companies did not really lose control of their relationship with host governments until the 1970s, when the concessionary system finally came close to being swept away. The long preceding decade of the 1960s had seen only minimal improvement for the host governments in the terms under which the majors did business with them."I8 The companies retained superior financial resources and capabilities in production, transportation, and marketing that the countries could not attain. Furthermore, the companies possessed superior information: "Whatever the weakness of company defences which is apparent in retrospect, the host governments did not realize it at the time. Their knowledge of the complexities of the industry was scanty, their experience of serious bargaining with the companies was limited and their awe of the companies was great."lg In addition, and perhaps most important, the feudal and semifeudal elites that controlled many oil-producing countries until the end of the 1960s were more often concerned with their personal and family interests than with modernization or national interests on a larger scale. Although the U.S. government did not participate directly in oil production or trade, it was the most influential actor in the system. The United States had moved decisively during and after World War I1 to ensure that U.S. companies would continue to control Saudi Arabian Later, when the Anglo-Iranian Oil Company became unwelcome as sole concessionaire in Iran, the United States sponsored an arrangement by which U.S. firms received 40 percent of the consortium established in the wake of the US.-sponsored coup that overthrew Premier Mossadegh

and restored the shah to his throne.2f U.S. tax policy was changed in 1950 to permit U.S. oil companies to increase payments to producing governments without sacrificing profits, thus solidifying the U.S. position in the Middle East and V e n e ~ u e l aThe United States had provided .~~ military aid and political support to the rulers of Saudi Arabia and Iran, maintaining close relations with them throughout the first two postwar decades (except for the Mossadegh period in Iran). And in case of trouble-as in 1956-1957-the United States was willing to use its own reserves to supply Europe with petroleum.23 The governing arrangements for oil thus reflected the U.S. government's interests in an ample supply of oil at stable or declining prices, close political ties with conservative Middle Eastern governments, and profits for U.S.-based multinational companies. The international economic regime of 1977 looked very different. Least affected was the trade regime, although even here important changes had taken place. Between 1967 and 1977, nontariff barriers to trade continued to proliferate, and the principle of nondiscrimination was further undermined. Restrictions on textile imports from less developed countries, originally limited to cotton textiles, were extended to woolen and manmade fabrics in 1974.24Nontariff barriers affecting world steel trade in the early 1970s included import licensing, foreign exchange restrictions, quotas, export limitations, domestic-biased procurement, subsidies, import surcharges, and antidumping measures.25 During the 1970s, "voluntary" export restraints, which had covered about one-eighth of U.S. imports in 1971, were further extended.26 In late 1977, the United States devised a "trigger price system" to help protect the U.S. steel industry from low-priced imports. Contemporaneously, the European Economic Community launched an ambitious program to protect and rationalize some of its basic industries afflicted with surplus but relatively inefficient capacity, such as steel and shipbuilding. On the basis of a general survey, the GATT secretariat estimated tentatively in 1977 that import restrictions introduced or seriously threatened by industrially advanced countries since 1974 would affect 3-5 percent of world trade-$30 to $50 billion. The stresses on the international trade system, according to the director-general of GATT, "have now become such that they seriously threaten the whole fabric of postwar cooperation in international trade Nevertheless, the weakening of some aspects of the international trade regime had not led, by the end of 1977, to reductions in trade or to trade wars; in fact, after a 4 percent decline in 1975, the volume of world trade Furthermore, by 1977 the rose 11 percent in 1976 and 4 percent in 1977,28 Tokyo round of trade negotiations was well underway; in 1979 agree-

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ment was reached on trade liberalizing measures that not only would (if put into effect) reduce tariffs on industrial products, but that would also limit or prohibit a wide range on nontariff barriers, including export subsidies, national preferences on government procurement, and excessively complex import licensing procedure^.^^ The weakening of elements of the old regime was therefore accompanied both by expanding trade (although at a lower rate than before 1973) and by efforts to strengthen the rules in a variety of areas. By 1977 the international monetary regime had changed much more dramatically. The pegged-rate regime devised at Bretton Woods had collapsed in 1971, and its jerry-built successor had failed in 1973. Since then, major currencies had been floating against one another, their values affected both by market forces and frequently extensive governmental intervention. In 1976 international agreement was reached on amendments to the Articles of Agreement of the International Monetary Fund, yet this did not return the world to stable international exchange rates or multilateral rule making but merely provided for vaguely defined "multilateral surveillance" of floating exchange rates. Exchange rates have fluctuated quite sharply at times, and have certainly been more unpredictable than they were in the 1960s. substantial secular changes have also taken place; nominal effective exchange rates on 15 May 1978, as a percentage of the rates prevailing in March 1973, ranged from 58.6 for Italy t o 130.0 for Germany and 154.2 for S ~ i t z e r l a n d . ~ ~ In the oil area, the rules of the old regime were shattered between 1967 and 1977, as power shifted dramatically from the multinational oil companies and home governments (especially the United States and Britain), on the one hand, to producing countries' governments, on the other. The latter, organized since 1960 in the Organization of Petroleum Exporting Countries, secured a substantial price rise in negotiations at Teheran in 1971, then virtually quadrupled prices without negotiation after the Yom Kippur War of October 1973. Despite some blustering and various vague threats the United States could d o little directly about this, although high rates of inflation in industrial countries and the decline of the dollar in 1977 helped to reduce substantially the real price of oil between 1974 and 1977.3' By 1977 the United States had apparently conceded control of the regime for oil pricing and production to OPEC, and particularly to its key member, Saudi Arabia. OPEC made the rules in 1977, influenced (but not controlled) by the United States. OnIy in case of a crippling supply embargo would the United States be likely to act. The United States was still, with its military and economic strength, an influential actor, but it was no longer dominant. Reviewing this evidence about three international economic regimes

supports the generalizations offered earlier. Although all three old regimes became weaker during the decade, this was most pronounced for oil and money, least for trade. In oil, furthermore, dominant coalitions changed as well, so that by 1977 the regime that existed, dominated by OPEC countries, was essentially a new regime. The old petroleum regime had disappeared. By contrast, the 1977 trade regime was still a recognizable version of the regime existing in 1967; and the international monetary regime of 1977, although vastly different than in 1967, retained the same core of supportive states along with the same international organization, the IMF, as its monitoring agent. Since the rules had changed, the function of the IMF had also changed; but it persisted as an element, as well as a symbol, of continuity. In the oil area, the emergence of the International Energy Agency (IEA) after the oil embargo symbolized discontinuity: only after losing control of the pricing-production regime did it become necessary for the industrialized countries to construct their own formal international organization.

The Theory of Hegemonic Stability and International Regime Change

It should be apparent from the above account that a theory purporting to explain international economic regime change between 1967 and 1977 faces two tasks: first, to account for the general pattern of increasing weakness, and second, to explain why the oil regime experienced the most serious changes, followed by money and trade. Furthermore, the hegemonic stability theory must show not only a correspondence between patterns of regime change and changes in tangible power resources, but it must be possible to provide at least a plausible account of how those resource changes could have caused the regime changes that we observe. The most parsimonious version of a hegemonic stability theory would be that changes in the overall international economic structure account for the changes in international regimes that we have described. Under this interpretation, a decline in U.S. economic power (as measured crudely by gross domestic product) would be held responsible for changes in international economic regimes. Power in this view would be seen as a fungible set of tangible economic resources that can be used for a variety of purposes in world politics. There are conceptual as well as empirical problems with this parsimonious overall structure theory. The notion that power resources are fungible-that they can be allocated to issues as policymakers choose,

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Table 6 . 2 ( c o n t . )

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TABLE 6 . 2 D i s t r i b u t i o n o f Economic Resources, by I s s u e Area, Artlong t h e Five Major Market-Economy C o u n t r i e s , 1960-1975

________--_.____I____.--__-_ _ . _

_ _ _ _ I ...----_. _ _ _ _-.---._._---_.-. .. - ..-I--

--

C.

A.

Ir_a&Resources United S t a t e s 13.4 14.4 15.0 13.0

( e x p o r t s plus iniports a s percentage o f world t r a d e ) Germany 8.1 9.4 11.0 10.0 Britain 8.7 8.0 6.9 5.8 France 4.3 Japan 3.3 4.2 6.2 6.6
U . S . a s Percent of Top r i v e Countries

Year 1960 1965 1970 1975

35 35 33 31

p e t r o l e u m Resources 1. U n i t e d S t a t e s imports and excess production c~axii&L~-t&c'? -c r i s i s years U.S. Excess Production U.S. Oil Imports a s Capacity a s Percent of Net U.S. Position Oil Consu;~iption Year Percent of Oil Consumption

-_

___________-.

__l_l_X_----_l

5.7 6.3 6.4

1956 1967 1973 Source: -

11 19 35

25 25

+14
t6

10

-25

m: Kenneth

N . Waltz, Theory of I n t e r n a t i o n a l P o l i t i c s (Reading, Mass. : Addison-Wesley, 1 9 7 9 ) , Appendix Table IV, p . 215. Last column c a l c u l a t e d from t h e s e f i g u r e s .

Joel Darmstadter and Hans H. Landsberg, "The Economic Background," i n Raymond Vernon, e d . , The Oil C r i s i s , special i s s u e of Daedalus, F a l l , 1975 (pp. 30-31).

2.

Oil Imports a s p e r c e n t a g e of energy supply Ratio o f U.S. t o European Dependence .18 .18

B.
Year

Monetary Resources ( r e s e r v e s a s percentage of w d d r e s e r v e s ) United S t a t e s Germany Britain France Japan U.S. a s P e r c e n t of l o p Five C o u n t r i e s Year 1967 1'370 1973 1976 United S t a t e s
9

Western Europe

Japan
62

p -

50 57 60 54 10 17

--

73 80
74

.28
.37

20

Source : C a l c u l a t e d from I n t e r n a t i o n a l F i n a n c i a l S t a t i s t i c s (Washington: IMF), Volume XXXI-5 (May, 1978), 1978 Supplement, pp. 34-35. Last column c a l c u l a t e d from t h e s e p e r c e n t a g e s . Source: Kenneth N . Waltz, Theory o f I n t e r n a t i o n a l P o l i t i c s (Reading, Mass. : m n - ~ e s l e y ,1979), Appendix Table X, p. 221. Last column c a l c u l a t e d from t h e s e f i g u r e s .

United States" in the monetary area by 1975. Yet it does, as indicated above, signal a very strong shift in the resource situation of the United States. Finally, the petroleum figures-especially in Table 6.2, C-1 -are dramatic: the United States went from a large positive position in 1956 and a small positive position in 1967 to a very large petroleum deficit by 1973. The hegemonic stability theory accurately predicts from this data that U.S. power in the oil area and the stability of the old international oil regime would decline sharply during the 1970s. These findings lend plausibility to the hegemonic stability theory by not disconfirnling its predictions. They do not, however, establish its validity, even for this limited set of issues over one decade. It is also necessary, before concluding that the theory account5 for the observed changes, to see whether plausible causal requences can be constructed

linking shifts in the international distribution of power to changes in international regimes. The following sections of this paper therefore consider the most plausible and well-founded particular accounts of changes in our three issue areas, to see whether the causal arguments in these accounts are consistent with the hegemonic stability theory. The ensuing discussion begins with oil, since it fits the theory so well, and then addresses the more difficult cases.

Interpreting Changes in the Petroieum Regime

The transformation in oil politics between 1967 and 1977 resulted from a change in the hegemonic coalition making the rules and supporting the regime: OPEC countries, particularly Saudi Arabia, replaced the West-

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ern powers, led by the United States. OPEC members had previously lacked the ability to capture monopolistic profits by forming a producers' cartel. In part, this reflected low self-confidence. Poor communications and a low level of information about one another also played a role, although both were already being corrected by greater elite sophistication and more intensive contacts among OPEC members. Yet OPEC's impotence was also a result, in the 1950s and 1960s, of overwhelming U.S. power. Until the huge asymmetry between U.S. power and that of the OPEC members was reduced or reversed, massive changes in the implicit regime could not be expected to occur. Without these changes, neither foolish U.S. tactics nor an Israeli-Arab war could have led to the price rises observed in February 1971, or OctoberDecember 1973.3s U.S. military power vis-a-vis Middle Eastern members of OPEC was lower in the late 1960s and early 1970s than it had been before the entry of Russia into the Middle East in 1955; but it is not clear that U.S. military power declined dramatically between 1967 and the oil crisis of 1973. Yet fundamental shifts in available petroleum supplies were taking place. When previous oil crises had threatened in the wake of ArabIsraeli wars in 1956 and 1967, the United States was able to compensate by increasing domestic production, since about 25 percent of its oilproducing capacity was not being used prior to each crisis. In 1973 U.S. spare capacity had declined to about 10 percent of the total. In 1956 U.S. imports were only about 11 percent of consumption, mostly from Venezuela and Canada; in 1967 they constituted 19 percent; but by 1973 they amounted to over 35 percent, a substantial proportion of which came from the Middle East. U.S. proved reserves had fallen from 18.2 to 6.4 percent of world proved reserves.36 In the earlier situations, the United States could be "part of the solution"; in 1973, it was "part of the problem." Its fundamental petroleum resource base had been greatly weakened. The hegemonic stability model leads us to expect a change in international petroleum arrangements during the mid-1970s: The dominance o f the United States and other industrialized countries was increasingly being undermined, as OPEC members gained potential power resources a t their expense. What the Yom Kippur War did was to make the Arab members of OPEC willing to take greater risks. When their actions succeeded in quadrupling the price of oil almost overnight, mutual confidence rose that members of the cartel who cut back production would not be "double-crossed" by other producers, but would rather benefit from the externalities (high prices as a result of supply shortages) created by others' similar actions. Calculations about externalities became

positive and risks fell. A self-reinforcing cycle of underlying resource strength leading to success, to increased incentives to cooperate, and to greater strength was launched.

Interpreting Changes in the International Monetary Regime The breakdown of the Bretton Woods pegged-rate monetary system is usually attributed by economists principally to two factors. First is the inherent instability of a gold-exchange standard, which Benjamin J. Cohen describes, with reference to the 1960s, as follows:
A gold-exchange standard is built on the illusion of convertibility of its fiduciary element into gold at a fixed price. The Bretton Woods system, though, was relying on deficits in the U.S. balance of payments to avert a world liquidity shortage. Already, America's "overhang" of overseas liabilities to private and official foreigners was growing larger than its gold stock at home. The progressive deterioration of the U.S. net reserve position, therefore, was bound in time to undermine global confidence in the dollar's continued convertibility. In effect, governments were caught on the horns of a dilemma. To forestall speculation against the dollar, U.S. deficits would have to cease. But this would confront governments with the liquidity problem. To forestall the liquidity problem, U.S. deficits would have to continue. But this would confront governments with the confidence problem. Governments could not have their cake and eat it too.37

This situation would have made the international monetary system of the 1960s quite delicate under the best of circumstances. As a response to it during the 1960s, negotiations took place to create Special Drawing Rights, designed to provide a source of international liquidity to serve in lieu of dollars when the U.S. deficit came to an end. Whether this reform would have been effective, however, is unclear because the conditions that it was meant to deal with never came into being. Rather than eliminating its deficit, the United States let its ba,ance of payments on current account deteriorate sharply in the last half of the 1960s, as a result of increased military spending to fight the Vietnam War, coupled with a large fiscal deficit, excess demand in the United States, and the inflationary momentum that resulted. When U.S. monetary policy turned from restriction to ease in 1970, in reaction to a recession, huge capital outflows took place. The U.S. decision of August 1971 to suspend the convertibility of the dollar into gold and thus to force a change in the Bretton Woods regime followed. An agreement reached in December 1971 to restore fixed exchange rates collapsed under the pressure of

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monetary expansion in the United States and abroad and large continuing U.S. deficits, which reached a total (on an official settlements basis) o f over $50 billion during the years 1970-1973.38 As this account suggests, the collapse of the international monetary regime in 1971-1973 was in part a result of the inherent instability of gold-exchange systems; but the proximate cause was U.S. economic policy, devised in response to the exigencies of fighting a n unpopular and costly war in Vietnam. The hegemonic stability theory does not account for either the long-run entropy of regimes resting on both gold and foreign exchange or policy failures by the U.S. government. Yet in at least a narrow sense the theory is consistent with events: the Bretton Woods regime collapsed only after U.S. reserves had fallen sharply, which contributed to the difficulty of maintaining the value of the dollar at the old exchange rates. The hegemonic stability theory is thus not disconfirmed by the monetary case. For several reasons, however, it functions as a highly unsatisfactory explanation of regime change in the monetary area. In the first place, the resources that were most important to the United States to maintain the regime were not tangible resources (emphasized by the theory) but the symbolic resources that go under the name of "confidence" in discussion of international financial affairs. U.S. reserves were less important than confidence in U.S. policy: as a reserve-currency country, the United States could generate more international money (dollars), as long as holders of dollars believed that the dollar would retain value compared to alternative assets, such as other currencies or gold. By 1970-1971, however, confidence in U.S. economic policy, and hence in the dollar, had become severely undermined, and after August 1971 became impossible to restore. The second major problem with the hegemonic stability theory's explanation of the monetary case is that it focuses on a variable-U.S. resources in the monetary area-which was itself largely a result of U.S. policy. The theory, as indicated earlier, is systemic: but the most important sources of change (reflected in resource shifts) lay within the U.S. polity. T o some extent, of course, this was true in the oil areas as well, since the United States could have conserved its oil resources during the 1950s and 1960s; but it is particularly important in monetary politics, since confidence depended on evaluations of U.S.-policy and expectations about it. Perceptions of U.S. economic policy as inflationary thus translated directly into loss of intangible U.S. resources (confidence on the part of foreigners) through changes in the expectations of holders, or potential holders, of dollars. The final problem with the explanation offered by the hegemonic

stability theory is that it does not capture the dual nature of the U.S. power position in 1971. On the one hand, as we have seen, the U.S. position was eroding. Yet to a considerable extent the scope of U.S. weakness was the result of the rules of the old regime: within these rules the United States, not being able to force creditor nations such as Germany and Japan to revalue their currencies, thus was in the position of having to defend the dollar by a variety of short-term expedients. Only by breaking the rules explicitly- by suspending convertibility of the dollar into gold -could the United States transform the bargaining position and make its creditors offer concessions of their own. As Henry Aubrey had pointed out in 1969, "surely a creditor's influence over the United States rests on American willingness to play the game according to the old concepts and rules. If the United States ever seriously decided to challenge them, the game would take a very different course."39 The United States thus had a strong political incentive to smash the old regime, and it also had the political power to d o so. Once the regime had been destroyed, other governments had to heed U.S. wishes, since the active participation of the United States was the sine qua non of a viable international monetary regime. As we have seen, the hegemonic stability theory is helpful in accounting for the collapse of the Bretton Woods regime, and its proposition linking potential power resources to regime outcomes is not disconfirmed by events. Yet the causal sequences that it suggests are not adequate; one has to take into account the symbolic nature of power resources, direct effects of U.S. policy, and the dual nature of the U.S. power position in 1971. On the basis of the hegemonic stability theory, one would predict that the major financial powers would have had great difficulty reconstructing the international monetary regime after the events of 1971. Yet the theory's precise prediction would have been ambiguous. As Table 6.1 indicates, in the early 1970s the gross domestic product of the United States still exceeded the combined total of the four next largest marketeconomy countries. Unilateral U.S. actions, furthermore, had strengthened the U.S. position and made its weak official reserve position less relevant. Thus there was some reason to believe that it might have been possible to reconstruct a stable international monetary regime under U.S. leadership in 1971. This, of course, failed to occur. The exchange rates established at the Smithsonian Institution in December 1971 collapsed within fifteen months. The United States was no more willing after 1971 to play a responsible, constrained international role than it had been during the six years before the destruction of the Bretton Woods regime. Indeed, the

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U.S. monetary expansion of 1972, which helped to secure Richard Nixon's reelection, implied a decision by the administration to abandon that role.40 Had its own economic policies been tailored to international demands, the United States could probably in 1971 have resumed leadership of a reconstructed international monetary system; but the United States did not have sufficient power to compel others to accept a regime in which only it would have monetary autonomy. Between 1971 and 1976, the United States was the most influential actor in international monetary negotiations, and secured a weak flexible exchange rate regime that was closer to its own preferences than to those of its partners; but given its own penchant for monetary autonomy, it could not construct a strong, stable new regime.

Interpreting Changes in the International Trade Regime As has been seen, changes in the trade regime between 1967 and 1977 were broadly consistent with changes in potential power resources in the issue area. Power resources (as measured by shares of world trade among the industrialized countries) changed less in trade than in money or oil; and the regime changed less as well. So once again, the hegemonic stability theory is not disconfirmed. The causal argument of the hegemonic stability theory, however, implies that the changes we do observe in trade (which are less than those in money and oil but are by no means insignificant) should be ascribable to changes in international political structure. Yet this does not appear to be the case. Protectionism is largely a grass-roots phenomenon, reflecting the desire of individuals for economic security and stability and of privileged groups for higher incomes than they would command in a free market. Adam Smith excoriated guilds for protecting the wages of their members at the expense of society (although to the advantage, he thought, of the towns).41 Officials of the GATT now criticize labor unions and inefficient industries for seeking similar protection and attempt to refute their arguments that such actions would increase national as well as group income. Most governments of advanced capitalist states show little enthusiasm for protectionist policies, but have been increasingly goaded into them by domestic interests. A recent GATT study identifies as a key source of protectionism "structural weaknesses and maladjustments" in the countries of the Organization for Economic Cooperation and Development (OECD). Its authors focus particularly on the recent tendency in Europe for wages t o rise at similar rates across sectors, regardless of labor productivity. Yet

industries that are old in one country, faced by dynamic, low-cost competitors from abroad, can only adjust effectively either by paying lower wages than higher-productivity industries or by reducing employment: "To maintain both the wage differential and the absolute size of employment in the industry, protection is necessary." Yet the workers affected and their political leaders may prevent steps to widen wage differentials or to reduce employment. This resistance to change leads both to inflation and to pressures for protection. According to this view, governments share the responsibility for inflation and protectionism insofar as they tolerate and accommodate these pressures.42 It may be true that for reasons internal to advanced industrial societies -or to certain societies, since some seem to be affected more than others -people of these countries are more resistant to adjustment than they once This may not just be a problem of the masses. More emphasis could be placed on insufficient levels of research and development by governments and firms, thus contributing to failure to innovate; or one could attempt t o account for stagnation by reference to managerial inadequacy on the part of leaders of established oligopolistic industries.44 In either case, however, explanations from domestic politics or political culture would appear necessary to account for changes in international regimes. Shifts in preference functions - from profit maximization to the quiet life, as Charles Kindleberger has put it -are not accounted for by the hegemonic stability Most explanations of increased protectionism also focus on the recession of the 1970s and the rise of manufactured exports from less developed countries. Between the end of 1973 and the end of 1977, rates of growth in industrial production lagged throughout the OECD area, and in Western Europe and Japan industrial production hardly grew at all. Unemployment rates in Europe in 1977 were three times as high as average unemployment rates between 1957 and 1973. At the same time, recessionary pressure was accentuated by the rapid growth of exports of manufactured goods from developing countries, which increased by about 150 percent in volume terms between 1970 and 1977, while manufacturing output in the developed market economy countries increased by only about 30 percent. Although developing countries still account for barely more than 10 percent of the combined manufacturing output of developing countries and developed market economy countries, that proportion has been rising and in some sectors (textiles; processed food, drink, and tobacco; and clothing, leather, and footwear) it exceeds or approaches 20 percent.46 Some recent restrictive measures, particularly the progressive tightening of export restraints on textiles, reflect these pressures from dynamic developing country exporters.

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TABLE 6 . 3 Hegemonic S t a b i l i t y and I n t e r n a t i o n a l Economic Regimes, 1966-1977: An A n a l y t i c a l Suinniary

To some extent, difficulties in maintaining liberal trade among the OECD countries do reflect erosion of U.S. hegemony, although this is more pronounced as compared with the 1950s than with the late 1960s. In the 1950s the United States was willing to open its markets to Japanese goods in order to integrate Japan into the world economic system, even when most European states refused to d o so promptly or fully. This has been much less the case in recent years. Until the European Common Market came into existence, the United States dominated trade negotiations; but since the EEC has been active, it has successfully demanded numerous exceptions to GATT rules. Relative equality in trade-related power resources between the EEC and the United States seems to have been a necessary, if not sufficient, condition for this shift.47 On the whole, the hegemonic stability theory does not explain recent changes in international trade regimes as well as it explains changes in money or oil. The theory is not disconfirmed by the trade evidence, and correctly anticipates less regime change in trade than in money or oil; but it is also not very helpful in interpreting the changes that we do observe. Most major forces affecting the trade regime have little t o do with the decline of U.S. power. For an adequate explanation of changes in trade, domestic political and economic patterns, and the strategies of domestic political actors, would have to be taken into account.

-I s s u e

Areas Trade

O i1 Correspondence Between Changes i n Power Resources and Changes i n I n t e r n a t i o n a l Regimes: E x t e n t o f change i n t a n g i b l e power r e s o u r c e s , 1965-1975 ( r a n k o r d e r s ) E x t e n t o f change i n r e g i m e , 1967-1977 ( r a n k o r d e r s ) Causal L i n k s : P l a u s i b i l i t y o f causal argument 1 i n k i n g t a n g i b l e r e s o u r c e changes t o changes i n t h e regime high

Money

medium

1 ow

Hegemonic Stability and Complex Interdependence: A Conclusion

A structural approach to international regime change, differentiated by issue area, takes us some distance toward a sophisticated understanding of recent changes in the international politics of oil, money, and trade. Eroding U.S. hegemony helps to account for political reversals in petroleum politics, to a lesser extent for the disintegration of the Bretton Woods international monetary regime, and to a still lesser extent for the continuing decay of the GATT-based trade regime. Table 6.3 summarizes the results of the analysis. There is a definite correspondence between the expectations of a hegemonic stability theory and the evidence presented here. Changes in tangible power resources by issue area and changes in regimes tend to go together. In terms of causal analysis, however, the results are more mixed. In the petroleum area a plausible and compelling argument links changes in potential economic power resources directly with outcomes. With some significant caveats and qualifications, this is also true in international monetary politics; but

in trade, the observed changes do not seem causally related to shifts in international political structure. On the basis of this evidence, we should be cautious about putting the hegemonic stability theory forward as a powerful explanation of events. It is clearly useful as a first step; to ignore its congruence with reality, and its considerable explanatory power, would be foolish. Nevertheless, it carries with it the conceptual difficulties and ambiguities characteristic of power analysis. Power is viewed in terms of resources; if the theory is to be operationalized, these resources have to be tangible. Gross domestic product, oil import dependence, international monetary reserves, and share of world trade are crude indicators of power in this sense. Less tangible resources such as confidence (in oneself or in a currency) or political position relative to other actors are not taken into account. Yet these sources of influence would seem to be conceptually as close to what is meant by "power resources" as are the more tangible and measurable factors listed above. Tangible resource models, therefore, are inherently crude and can hardly serve as more than first-cut approximations -very rough models that indicate the range of possible behavior or the probable path of change, rather than offering precise predictions. The version of the hegemonic stability theory that best explains inter-

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national economic regime change between 1967 and 1977 is an "issue structure" rather than "overall structure" That is, changes in power resources specific to particular issue areas are used to explain regime change. Issue structure models such as this one assume the separateness of issue areas in world politics; yet functional linkages exist between issue areas, and bargaining linkages are often drawn by policymakers between issue areas that are not functionally linked. The decline in the value of the dollar from 1971-1973, after the conclusion of the Teheran Agreements in February 1971, contributed strongly to dissatisfaction by OPEC states with oil prices, since it adversely affected their share of the rewards.49 Sudden oil price rises had a major impact on the international financial system during 1974; if floating exchange rates had not already been in place, they would almost certainly have had to be implemented. And the inflationary effects of monetary disorder and oil price rises, as well as the recessionary effects of those price increases, certainly had an impact on the international trade regime, although the effects are more difficult to trace. The existence of interissue linkages limits the explanatory power of issue structure models. T o solve this problem would require a strong and sophisticated theory of linkage, which would indicate under what conditions linkages between issue areas would be important and what their impact on outcomes would be.50No issue-specific explanation of events can be completely satisfactory in a world of multiple issues linked in a variety of ways. D e s ~ i t e the limitations on power structure analysis, beginning with all it has the great advantage of setting up some very general predictions based on a theory that requires only small amounts of information. A remarkable portion of the observed changes rely only on this parsimonious, indeed almost simple-minded, theory. Furthermore, its very inadequacies indicate where other explanations and other levels of analysis must be considered. Having examined the explanatory strengths and weaknesses of a hegemonic stability theory, we understand better what puzzles remain to be solved by investigating other systemic theories or by focusing on domestic politics and its relationship to foreign economic policy. Beginning with a simple, international-level theory clarifies the issues. It helps to bring some analytical rigor and order into the analysis of international economic regimes. Without employing a structural model as a starting point, it is difficult to progress beyond potentially rich but analytically unsatisfactory description, which allows recognition of complexity to become a veil hiding our ignorance of the forces producing change in world political economy. T o limit ambitions to such description would be a premature confession of failure.

Acknowledgments I have benefited from comments by numerous colleagues on earlier drafts of this chapter. I a m particularly obliged for extensive comments to Benjamin J. Cohen, Peter J. Katzenstein, Stephen D. Krasner, and David Laitin; and to three graduate students at Stanford University, Vinod Aggarwal, Linda Cahn, and David Yoffie. My greatest debt is t o Alexander George, who went beyond a n editor's call of duty by thoroughly pointing out the lacunae and non sequiturs in two earlier drafts. The first draft of this chapter was written when I was a fellow a t the Center for Advanced Study in the Behavioral Sciences. There I benefited from the research assistance of Shannon Salmon and from research support from the German Marshall Fund of the United States and the National Science Foundation, the latter through a grant to the Center for Advanced Study (BNS 76-22943).

Notes
1 . For figures relating to these points, see Paul McCracken et al., Towards FUN Employment and Price Stability (Paris: Organization for Economic Cooperation and Development, 1977), esp. pp. 41-42. Cited below as "McCracken

Report." 2. See, for instance, George Liska, Imperial America: The International Politics of Primacy, no. 2 (Washington, D.C.: Johns Hopkins Studies in International Affairs, 1967); J. J. Servan-Schreiber, The American Challenge, trans. Ronald Steel (New York: Avon Books, 1969); and Harry Magdoff, The Age of Imperialism (New York: Monthly Review Press, 1969). 3. Susan Strange, "The Management of Surplus Capacity," International Organization 33 (Summer 1979). 4. For a similar earlier definition, see Robert 0. Keohane and Joseph S. Nye, Jr., Power and Interdependence: World Politics in Transition (Boston: Little, Brown and Co., 1977)' p. 19-22. 5. Edith T. Penrose, The Large International Firm in Developing Countries: The International Petroleum Industry (Cambridge, Mass. : M. I .T. Press, 1968), pp. 150-165, 183-197; and Morris A. Adelman, The World Petroleum Market (Baltimore, Md.: Johns Hopkins University Press, 1971), pp. 78-100. 6. This way of thinking about international regimes was suggested by the work of Clifford Geertz, especially his essay, "Thick Description: Toward an Interpretive Theory of Culture," in Clifford Geertz, The Interpretation of Cultures (New York: Basic Books, 1973). Geertz, however, is principally concerned with meaning and symbolism, whereas the explanatory theory tested in this paper emphasizes tangible power resources. Thus, apart from the suggestiveness of

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Geertz's concept of culture for the concept of regime, this chapter has little in common with Geertz's mode of analysis. 7. See especially Peter J. Katzenstein, ed., Between Power and Plenty: Foreign Economic Policies of Advanced Industrial States (Madison: University of Wisconsin Press, 1978). As noted in the text, the dependent variable of this study is national political strategy, not change in international regimes. 8. For a lucid discussion of these issues, see Kenneth N. Waltz, Theory of International Politics (Reading, Mass: Addison-Wesley Publishing Co., 1979), chap. 1. 9. For analysis along these lines, see the following: Charles P. Kindleberger, The World in Depression, 1929-1939 (Berkeley: University of California Press, 1974); Robert Gilpin, U.S. Power and the Multinational Corporation (New York: Basic Books, 1975); and Stephen D. Krasner, "State Power and the Structure of International Trade," World Politics 28 (April 1976):317-347. 10. Kindleberger relies most heavily on the theory of collective goods. See his "Systems of International Economic Organization," in David P. Calleo, ed., Money and the Coming World Order (New York: New York University Press for the Lehrman Institute, 1976), pp. 19-20; and Kindleberger, The World in Depression, chap. 14. It is necessary to be cautious in viewing international regimes as "collective goods," since in many cases rivalry may exist (everyone may benefit from stable money but not everyone can benefit noncompetitively from an open U.S. market for imported electronic products) and countries can be excluded from many international regimes (as the debate over whether to give mostfavored-nation status to the Soviet Union illustrates). On the provision of collective goods, a useful article is Mancur Olson, Jr., and Richard Zeckhauser, "An Economic Theory of Alliances," Review of Economics and Statistics 48 (1966): 266-279, reprinted in Bruce Russett, ed., Economic Theories of International Politics (Chicago: Markham Publishing Co., 1968). See also John Gerard Ruggie, "Collective Goods and Future International Collaboration," American Political Science Review 66 (September 1972):874-893. 11. Both Krasner, "State Power," and Kindleberger, World In Depression, make this admission. The hegemonic stability theory is criticized by David P. Calleo in his concluding essay in Benjamin Rowland, ed., Balance of Power or Hegemony: the Interwar Monetary System (New York: New York University Press, published for the Lehrman Institute, 1976). Calleo dislikes hegemony and seems reluctant to admit its association with economic order; he therefore seeks both to reinterpret the pre-1914 period as not "imperial," and to characterize the bloc system of the 1930s as having "worked relatively well." Harold van B. Cleveland and Benjamin Rowland make better differentiated arguments in the same volume that critique or qualify the hegemonic stability thesis. 12. The problem with "force activation models" is that such models can "save" virtually any hypothesis, since one can always think of reasons, after the fact, why an actor may not have used all available potential power. See James G. March, "The Power of Power," in David Easton, ed., Varieties of Political Theory (New York: Prentice-Hall, 1966), esp. pp. 54-61. See also John C. Harsanyi, "Measurement of Social Power, Opportunity Costs, and the Theory of

Two-Person Bargaining Games," Behavioral Science 7 (1962):67-80. 13. Peter A. Gourevitch, "The Second Image Reversed," International Organization 32 (Autumn 1978):881-912. 14. Recent work on foreign investment indicates that international regimes in this area have also changed since 1967. See Stephen D. Krasner, Defending the National Interest: Raw Materials Investment and U.S. Foreign Policy (Princeton, N.J.: Princeton University Press, 1978); and Charles Lipson, Standing Guard: The Protection of Foreign Investment (Berkeley: University of California Press, forthcoming). 15. Robert E. Hudec, The GATT Legal System and World Trade Diplomacy (New York: Praeger Publishers, 1975), p. 256. See also Gardner C. Patterson, Discrimination in International Trade (Princeton, N.J.: Princeton University Press, 1965). 16. For good discussions, see Benjamin J. Cohen, Organizing the World's Money: The Political Economy of International Monetary Relations (New York: Basic Books, 1977); C. Fred Bergsten, Dilemmas of the Dollar (New York: New York University Press, 1975); Alfred E. Eckes, Jr., A Search for Solvency: Bretton Woods and the International Monetary System, 1941-1971 (Austin: University of Texas Press, 1975); and Fred Hirsch, Money International (London: Penguin Press, 1967). 17. Harold T. Shapiro, "Inflation in the United States," in Lawrence B. Krause and Walter S. Salant, eds., Worldwide Inflation: Theory and Recent Experience (Washington, D.C. : Brookings Institution, 1977). 18. Louis Turner, Oil Companies in the International System (London: George Allen & Unwin for the Royal Institute of International Affairs, 1978), p. 70. 19. Ibid., pp. 94-95. 20. Gabriel Kolko, The Politics of War: 1943-45 (New York: Vintage Books, 1968), pp. 294-307; Krasner, Defending the National Interest, pp. 190-205; Herbert Feis, Petroleum and American Foreign Policy (Stanford, Calif.: Food Research Institute, Stanford University, March 1944); Herbert Feis, Seen From E.A.: Three International Episodes (New York: Alfred A. Knopf, 1947), pp. 104ff.; and Benjamin Shwadran, The Middle East, Oil and the Great Powers (New York: Praeger Publishers, 1955), pp. 302-309. See also Foreign Relations of the United States (Washington, D.C.: U.S. Government Printing Office, 1943 and 1944), vol. 4, pp. 941-948; vol. 3, pp. 94-1 11. 21. See Krasner, Defending the National Interest, pp. 119-128; Joyce and Gabriel Kolko, The Limits of Power: The World and American Foreign Policy, 1946-1954 (New York: Harper & Row, 1972), pp. 413-420; John M. Blair, The Controlof Oil(New York: Pantheon Books, 1976), pp. 43-47,78-80; U.S., Congress, Senate, Committee on Foreign Relations, Subcommittee on Multinational Corporations, The International Petroleum Cartel, The Iranian Consortium and U.S. National Security, Committee Print, 93d Cong., 2d sess., 21 February 1974. 22. U.S., Congress, Senate, Committee on Foreign Relations, Subcommittee on Multinational Corporations, Multinationa/ Corporations and United States

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fire@ Policy, Pzrt 4, Hearings, 93d Cong., 2d sess. 30 January 1974, pp. 84-1 10. See also Glenn P . Jenkins and Brian D. Wright, "Taxation of Income of Multinational Corporations: The Case of the United States Petroleum Industry," Review of Economics and Statistics 17 (February 1975); and Krasner, Defending the National Interest, pp. 205-213. 23. US.,Congress, Senate, Committee on the Judiciary and on Interior and Insular Affairs, Emergency Oil Lifl Program, Hearings, 85th Cong., 1st sess., February 1957; OECD, Europe's Need for Oil: Implications and Lessons of the Suez Crisis (Paris, 1958); and News Conference of President Eisenhower, 6 February 1957 (Public Papers of the President, 1957), p. 124. 24. This was accomplished by the Arrangement Regarding International Trade in Textiles, known as the "Multifiber Agreement," or MFA. For the text, see "Arrangement Regarding International Trade in Textiles" (GATT publication, 1974). UNCTAD has commented on implementation of the agreement in "International Trade in Textiles," Report by UNCTAD secretariat, 12 May 1977. 25. Craig R. MacPhee, Restrictions on International Trade in Steel (Lexington, Mass.: Lexington Books, 1974). 26. C. Fred Bergsten, "On the Non-Equivalence of Import Quotas and 'Voluntary' Export Restraints," in C. Fred Bergsten, ed., Toward a New World Trade Policy: The Maidenhead Papers (Lexington, Mass.: Lexington Books, 1975). 27. IMF Survey, 12 December 1977, p. 373. 28. IMF Survey, 20 March 1978, p. 81; and 18 September 1978, p. 285. 29. New York Times, 12 April 1979. 30. Morgan Guaranty Trust Company, World Financial Markets, May 1978. 31. On the basis of an index with 1974 as 100, OPEC's terms of trade had declined by 1977 to 91.0 (and by 1978 to 81.0). In 1977 this reflected import prices that were 25 percent higher, compared with oil prices that had only increased by 14 percent. Morgan Guaranty Trust Company, World Financial Markets, December 1978. 32. As an argument against the overall structural version of a hegemonic stability theory, this is convincing, since it is hard to see how undifferentiated economic power resources (as measured by gross domestic product) would be equally efficacious in a variety of issue areas. As a general criticism of much international relations literature, the criticism is too harsh. Those who use the notion of undifferentiated power in world politics have rather clear assumptions about the nature of world politics, which help to set (admittedly broad) scope conditions on their generalizations. For what these authors regard as the essential core of world politics (adversary relations among competitive states), aggregate economic resources, and the military capabilities for which economic resources are essential preconditions, play an extremely large role. For the quotation in the text and the policy-contingency argument, see David A. Baldwin, "Power AnaIysis and World Politics: New Trends vs. Old Tendencies," World Politics (January 1979):165. For a carefully worked-out overall structure argument, see Waltz, Theory of Internatronal Politics. 33. Since excess U.S. capacity fell between 1967 and 1976, the figures in Table

6.2, part C-2, actually understate the increase in U. S. dependence on foreign oil during that nine-year period. In 1967 the United States could have withstood a complete embargo quite comfortably (apart from any obligations or desire it might have had to export oil), simply by increasing production from shut-in wells. In a sense, then, its real energy dependence increased from zero to 20 percent during the 1967-1976 period. 34. U.S. liquid liabilities to all foreigners began to exceed reserve assets in 1959 (not alarming for a country acting in many ways like a bank), and had reached five times reserve assets by 1971. The United States in the Changing World Economy, statistical background material (Washington, D.C.: U.S. Government Printing Office, 1971), chart 53, p. 40. However, total U.S. assets abroad remained about 50 percent higher than foreign assets in the United States in 1975 [International Economic Report of the President (January 1977), p. 1611. 35. For discussions of U.S. tactics at Teheran in 1971, see Henry M. Schuler, "The International Oil Negotiations," in I. William Zartman, ed., The 50% Sohtion (New York: Doubleday & Co., 1976), pp. 124-207; John M. Blair, The Control of Oil, pp. 223-227; and Edith T. Penrose, "The Development of Crisis," in Raymond Vernon, ed., The Oil Crisis, special issue of Daedalus (Fall 1975):3957. The Oil Crisis also contains a number of accounts of other aspects of the events in 1973-1974. 36. Joel Darmstadter and Hans H. Landsberg, "The Economic Background," in Raymond Vernon, ed., The Oil Crisis, special issue of Daedalus (Fall 1975):30-32. 37. Benjamin J. Cohen, Organizing the World's Money, p. 99. 38. "McCracken Report," pp. 52-56; charts 14B (p. 83) and 12 (p. 71). See also Cohen, Organizing the World's Money, pp. 103-104. 39. Henry Aubrey, "Behind the Veil of International Money," Princeton Essays in International Finance, no. 71 (January 1%9):9. 40. For a discussion of President Nixon's manipulation of U.S. monetary policy for electoral purposes in 1971-1972, see Edward R. Tufte, Political Control of the Economy (Princeton, N.J.: Princeton University Press, 1978), pp. 45-55. 41. Adam Smith, A n Inquiry into the Nature and Causes of the Wealth of Nations, book 1 , part 2, chap. 10, (Chicago: University of Chicago Press, 1976), pp. 132ff. 42. Richard Blackhurst, Nicolas Marian, and Jan Tumlir, Trade Liberalization, Protectionism and Interdependence, GATT Studies in International Trade, no. 5 (Geneva: GATT, November 1977), esp. pp. 44-52. For a discussion along similar lines, see the "McCracken Report," esp. chaps. 5, 8. 43. William Diebold, Jr., "Adaptation to Structural Change," International Affairs (October 1978). 44. The emphasis on innovation and technological development is suggested by Schumpeter's theory of economic development and has been the subject of substantial recent comment in the business press in the United States. See Joseph A. Schumpeter, The Theory of Economic Development: An Inquiry into Profits,

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Capital, Credit Interest and the Businrss Cycle, translated from the German by Redvers Opie, 1934 (Cambridge, Mass.: Harvard University Press, 1951); and Schumpeter, Business Cycles 2 vols., (New York: McGraw-Hill Book Co., 1939). A critique of attempts to attribute Britain's poor economic performance in the last quarter of the nineteenth century to low-quality managerial and entrepreneurial skills can be found in Donald N. McCloskey, Economic Maturity and Entrepreneurial Decline: British Iron and Steel, 1870-1913 (Cambridge, Mass.: Harvard University Press, 1973). 45. Kindleberger, Economic Response, chap. 7. 46. For the figures, see United Nations Conference on Trade and Development, Review of Recent Trends and Developments in Trade in Manufactures and Semi-Manufactures, Report b y the secretariat, 21 March 1978, chart 1 , p. 4 and chart 3, p. 24. 47. On discrimination against Japan, see Gardner C. Patterson, Discrimination in International Trade chap. 6, pp. 271-322; on the EEC and the United States in trade negotiations, see Robert E. Hudec, The GATTLegal System and World Trade Diplomacy. 48. The distinction between "issue structure" and "overall structure" models is drawn in Keohane and Nye, Power and Interdependence, chap. 3. 49. Edith T. Penrose, "The Development of Crisis," in Vernon, ed., The Oil Crisis, pp. 39-58. 50. Kenneth A. Oye has made some useful distinctions that may help to contribute to such a theory. See "Towards Disentangling Linkage: Issue Interdependence and Regime Change," mimeo (Berkeley, Calif.: Institute of International Studies, April 1979).

P. TERRENCE HOPMANN TIMOTHY D. KING

From Cold War to Detente: The Role of the Cuban Missile Crisis and the Partial Nuclear Test Ban Treaty

Introduction The period from the Cuban missile crisis of October 1962 to the signing of the Partial Nuclear Test Ban Treaty in July 1963 reflected a fundamental shift in the overall relations between the two major protagonists of the postwar period, the United States and the Soviet Union. The Cuban missile crisis was in many respects a culmination of the cold war tensions that had been building in a steady, though uneven, progression since the end of World War 11. By bringing the world to the threshold of nuclear war, the likelihood of which President Kennedy estimated as between one in three and one in two,' the crisis spurred a reconsideration of those cold war policies that brought the world so close to nuclear destruction. It also provided an incentive for policymakers to develop innovative solutions to those problems that were perceived to be root causes of the crisis, including the Soviet-U.S. arms race. Although measures to limit the arms race had been discussed for almost a decade, no concrete results had been achieved prior to the outbreak of the Cuban missile crisis. However, only ten months after the crisis was resolved, the stalemate which had characterized all previous arms control negotiations was broken with the signing of the Partial Nuclear Test Ban Treaty. This treaty did not abolish nuclear testing altogether, as the superpowers continued underground testing while other nuclear powers such as France and the People's Republic of China refused to sign the agreement. Nevertheless, President Kennedy saw this treaty as the first step to "reduce tension, to slow down the perilous arms race and to, check the In world's slide toward final annihilati~n."~ the span of ten months Soviet-U.S. relations moved from the most dangerous event in the postwar period to perhaps the most hopeful.